Vietnam’s FDI policy needs revision to maximise benefits

NDO - Vietnam's foreign direct investment (FDI) pledges and disbursement hit a 10-year record high in 2017, which has gradually created a pervasive influence on the domestic sector. However, it is time to adopt a completely new FDI attraction strategy in accordance with the new situation in order to boost the effectiveness and spillover effect of FDI in the future.

Increases in both volume and quality

Despite the negative indications in the beginning of the year, including the unilateral withdrawal of the US from the Trans-Pacific Partnership (TPP) and growing protectionism in many countries, Vietnam’s FDI attraction in 2017 achieved impressive results. According to the Foreign Investment Agency under the Ministry of Planning and Investment (MPI), total FDI pledges reached US$35.88 billion in 2017, up 44.4% compared to 2016 which is the highest increase over the past ten years. FDI disbursement also surpassed the record set in 2016 (US$15.8 billion) to hit US$17.5 billion.

In addition, FDI made significant contributions to exports, accounting for nearly 72% of Vietnam's total export revenue in 2017 and helping Vietnam's export revenue increase by 21.1% compared to 2016, the highest growth in many years.

The quality and effectiveness of FDI projects were also improved with many large-scale projects investing in the manufacturing industry, making considerable contributions to surpassing the economic growth rate of 6.7% for the whole of 2017.

2017 also witnessed large projects by giant multinational corporations including Samsung, Bosch and Panasonic in the area of research and development which is considered a gateway to gaining better access to the fourth industrial revolution, according to Prof. Dr. Nguyen Mai, chairman of Vietnam's Association of Foreign Invested Enterprises (VAFIE).

Challenges from the inside

Vietnam is obviously an attractive destination for foreign investors thanks to its increasingly enhanced status, political and macroeconomic stability and improved investment environment.

Experts forecast that FDI inflow into Vietnam will certainly maintain its growth until 2020. However, FDI inflow into Vietnam will be affected by instability stemming from geopolitical disputes between world powers and the upward trend of protectionism. In fact, Vietnam's economy still reveals internal inadequacies that have not been overcome including a lack of high quality human resources, poor infrastructure and services, an undeveloped support industry, low labour productivity, and a gap between policy and policy enforcement.

In addition, FDI projects exist that may create negative impacts on the environment including three projects worth US$6-US$7 billion invested in the area of thermal coal power last year. In the context that Vietnam is boosting green economic development to respond to the increasingly negative effects of climate change, the attraction of FDI in this area should be considered carefully.

Many warnings indicate that if Vietnam continues to maintain its current economic structure, pollutant emissions, particularly in the energy sector, will double in the next 10 years. This is a disadvantage for Vietnam as it is on the list of countries that face the highest risk from climate change. "Why do we continue to attract coal power projects while other countries are promoting investment in green and renewable energy?" Nguyen Mai asked.

Localities in Vietnam also roll out the red carpet for FDI projects worth less than US$1 million. These small projects would be worth applauding if they were deployed in the service sector such as tourism, technology and law consultancy. But it will require more careful consideration if they are deployed in areas that domestic enterprises are capable of undertaking as domestic enterprises are now being overwhelmed by foreign enterprises.

Director of Vietnam Institute of Economics Tran Dinh Thien said that the disparity between gross domestic product (GDP) and gross national income (GNI) shows that there is a big gap between the contributions of the FDI sector and domestic sector to the GDP, under which the proportion of FDI sector's contributions to the economy is increasing while the proportion of the domestic sector's contributions is falling.

It seems that we are focusing on attracting FDI for economic growth rather than facilitating domestic enterprises. Thien noted that GDP growth and exports are becoming increasingly dependent on the FDI sector while the production of domestic enterprises is running into many difficulties.

The biggest challenge in FDI attraction is that its pervasive influence has yet to meet expectations and has yet to create specific support for domestic enterprises to participate further in the global supply chain. Only 21% of Vietnamese enterprises have participated in the global supply chain while the rate is 30% in Thailand and 46% in Singapore.

Speaking at a recently held conference, Deputy Prime Minister Vuong Dinh Hue also wondered how to connect domestic enterprises with the global value chain as the facts show that the domestic and FDI sectors have yet to connect closely with each other and do not develop equally.

According to Nguyen Manh Linh from the Ministry of Industry and Trade's Institute for Industrial Policy and Strategy, the loose connectivity between domestic and foreign investors comes from both sides. A small number of domestic enterprises are capable of supplying inputs for FDI enterprises due to limited production technology, management capacity and types of products, in addition to a lack of support programmes from the Government and business support agencies.

Meanwhile, FDI enterprises are not active in connecting and supporting domestic enterprises to participate in their production chain. The implementation of FDI firms' commitments on technical assistance and technology transfer seems to have been abandoned, resulting in the risk that FDI enterprises can easily come and leave Vietnam depending on the attractiveness of the market.

A totally new strategy needed

If FDI attraction only focuses on the volume of capital, it will result in negative consequences including the destruction of the environment, exhausted natural resources and restrained economic development. Amid these challenges, experts advise that it is time to shape new directions and policies on FDI attraction, under which Vietnam would be able to quickly keep pace with the considerable changes caused by the Industry 4.0.

FDI attraction strategies and preferential policies need to be changed to give more priority to green and modern technology. Prof. Dr. Nguyen Mai recommended that Vietnam should revise its preferential policies for FDI enterprises towards providing preferential treatment to projects bringing about high economic efficiency and a low impact on the environment instead of basing it on the project scale or the number of jobs generated as before.

In addition, it is advisable to revise the whole process of a FDI project including investment promotion, project appraisal, licensing, and project implementation and evaluation.

Opportunities for multinational corporations to invest in Vietnam will be expanded if Vietnam's investment promotion becomes more specific but not over-diversified as at present. The appraisal of FDI projects also needs to be changed in respect of the long-term interests of the country to provide sustainable values for Vietnam in the future.